Book IV, Chapter VI, 1

ON TREATIES OF COMMERCE.

When a nation binds itself by treaty either to admit certain goods from one foreign country while excluding them from every other, or to exempt one country's goods from duties imposed on those of every other country, the favored country—or at least its merchants and manufacturers—must necessarily gain a great advantage from the treaty. Those merchants and manufacturers enjoy a kind of monopoly in the country granting them this privilege. That country becomes both a larger and a more profitable market for their goods: larger because, with other nations' goods excluded or charged heavier duties, it buys more of theirs; more profitable because the favored country's merchants, enjoying a kind of monopoly there, can often sell at a better price than they could under free competition from all other nations.

Yet such treaties, though they may benefit the favored country's merchants and manufacturers, necessarily disadvantage those of the country granting the favor. A foreign nation is given a monopoly at their expense, and they must often pay more for the foreign goods they need than if other nations were free to compete. The portion of the favoring nation's produce with which it buys foreign goods must consequently sell more cheaply: when two things are exchanged, one thing's cheapness necessarily follows from—or rather is identical with—the other's dearness. The exchangeable value of its annual produce is thus likely to be reduced by every such treaty. This reduction, however, can scarcely mean an actual loss, only a smaller gain than might otherwise be made. Though the nation sells its goods for less than it otherwise might, it will probably not sell them below cost or, as under bounties, at a price insufficient to replace the capital employed in bringing them to market together with the ordinary profits of stock. The trade could not last long if it did. Even the nation granting the favor, therefore, may still gain by the trade, though less than it would under free competition.

Some commercial treaties, however, have been thought beneficial on very different grounds. A commercial country has sometimes granted foreign goods this kind of monopoly against its own interests because it expected, in the total commerce between the two countries, to sell more each year than it bought and to receive an annual balance in gold and silver. It is on this principle that the commercial treaty concluded between England and Portugal in 1703 by Mr Methuen has been so highly praised. The following is a literal translation of that treaty, which has only three articles.

ART. I. His sacred royal majesty of Portugal promises, both in his own name and in the name of his successors, to admit into Portugal forever hereafter the woolen cloths and other woolen manufactures of the British, as was customary before the law prohibited them; nevertheless, on this condition:

ART. II. Her sacred royal majesty of Great Britain shall, in her own name and that of her successors, be bound forever hereafter to admit into Britain wines grown in Portugal. At no time, whether the kingdoms of Britain and France are at peace or at war, shall any custom, duty, or other charge, directly or indirectly, be demanded for these wines, whether imported into Great Britain in pipes, hogsheads, or other casks, beyond what is demanded for an equal quantity or measure of French wine less one-third of that custom or duty. But if anyone at any time attempts in any way to impair this deduction or abatement of customs, as provided above, his sacred royal majesty of Portugal shall be entitled to prohibit once more the woolen cloths and other British woolen manufactures.

ART. III. The most excellent lords plenipotentiary promise and undertake that their above-named sovereigns shall ratify this treaty, and that the ratifications shall be exchanged within two months.

By this treaty the crown of Portugal is bound to admit English woolens on the same terms as before the prohibition: that is, not to raise the duties previously paid. It is not bound to admit them on better terms than those offered to any other nation, France or Holland, for example. The crown of Great Britain, by contrast, is bound to admit Portuguese wines on payment of only two-thirds the duty charged on French wines, their most likely competitors. In this respect, therefore, the treaty is plainly advantageous to Portugal and disadvantageous to Great Britain.

Nevertheless it has been celebrated as a masterpiece of English commercial policy. Portugal annually receives from the Brazils more gold than its domestic commerce can employ, whether as coin or as plate. The surplus is too valuable to be left idle and locked in coffers; unable to find a profitable market at home, it must be sent abroad in spite of any prohibition and exchanged for something that has a better market at home. A large portion comes to England every year in payment either for English goods or for goods of other European nations whose returns pass through England. Mr Barretti was told that, on average, the weekly packet boat from Lisbon brings more than £50,000 in gold to England. The figure was probably exaggerated: it would total more than £2,600,000 a year, more than the Brazils are supposed to produce.

Some years ago our merchants were displeased with the crown of Portugal. Certain privileges granted to them not by treaty but by that crown's free grace—probably at the request of the British crown, and in return for far greater favors in the form of defense and protection—had been infringed or revoked. The people ordinarily most interested in praising the Portugal trade were therefore inclined at the time to portray it as less profitable than commonly supposed. Almost all of this yearly import of gold, they claimed, was on account not of Great Britain but of other European nations, while the Portuguese fruit and wine imported into Great Britain each year nearly made up the value of the British goods sent to Portugal.

But suppose that the whole import was on account of Great Britain and amounted to even more than Mr Barretti appears to imagine. This would not make the trade more advantageous than any other in which goods sent out for the same value brought back an equal value of consumable goods.

Only a very small portion of this imported gold can be supposed to add each year to the kingdom's plate or coin. All the rest must be sent abroad and exchanged for consumable goods of one kind or another. But England would be better off buying those consumable goods directly with the produce of English industry than first buying Portuguese gold with that produce and then buying the goods with the gold. Direct foreign trade in goods for consumption is always more advantageous than indirect trade: to bring the same value of foreign goods into the home market requires much less capital by the first route than by the second. If less of our industry had therefore been employed in producing goods suitable for the Portugal market, and more in producing goods suitable for the other markets where the consumable goods wanted in Great Britain can be obtained, England would have benefited. Obtaining both the gold needed for its own use and those consumable goods would then employ much less capital than it does now. Capital would consequently remain available for other purposes, to stimulate more industry and raise a greater annual produce.

Even if Britain were excluded entirely from the Portugal trade, it would have little difficulty obtaining all the gold it needs each year for plate, coin, or foreign trade. Gold, like any other commodity, can always be obtained somewhere at its value by those who have that value to offer. Portugal's annual surplus of gold would still be sent abroad; if Great Britain did not take it, some other nation would and would gladly sell it again for its price, just as Great Britain now does. In buying gold from Portugal, to be sure, we buy it firsthand; buying it from any other nation except Spain would mean buying it secondhand, perhaps at a somewhat higher price. Surely this difference would be too slight to merit public concern.

Nearly all our gold, it is said, comes from Portugal. Our balance of trade with other nations is either against us or only slightly in our favor. But we should remember that the more gold we import from one country, the less we must necessarily import from all the others. Like the effective demand for any other commodity, a country's effective demand for gold is limited to a certain quantity. If nine-tenths of it is imported from one country, only one-tenth remains to be imported from all the others. Moreover, the more gold we import each year from certain countries beyond what we need for plate and coin, the more we must export to others. Thus the more the balance of trade—that most insignificant concern of modern policy—appears in our favor with some countries, the more it must necessarily appear against us with many others.

Yet it was on this foolish idea, that England could not survive without the Portugal trade, that France and Spain, toward the end of the late war, demanded without even alleging an offense or provocation that the king of Portugal exclude every British ship from his ports and admit French or Spanish garrisons to secure that exclusion. Had the king of Portugal accepted the humiliating terms proposed by his brother-in-law the king of Spain, Britain would have been rid of an inconvenience much greater than losing the Portugal trade: the burden of supporting an exceedingly weak ally, so ill provided with everything needed for his own defense that even the whole power of England, directed solely to that purpose, might scarcely have defended him for another campaign. Losing the Portugal trade would undoubtedly have caused serious difficulty for merchants then engaged in it, who might not have found another equally profitable use for their capitals for a year or two. That would probably have been the whole inconvenience England suffered from this remarkable piece of commercial policy.

The great annual import of gold and silver serves neither plate nor coin but foreign trade. Indirect foreign trade in goods for consumption can be conducted more advantageously with these metals than with almost any other goods. As the universal instruments of commerce, they are more readily accepted in exchange for all commodities than any other goods; and their high value in a small bulk makes them cheaper to carry back and forth between places than almost any other merchandise, with less loss of value in transit. Of all commodities bought in one foreign country solely to be sold or exchanged for other goods in another, therefore, none are as convenient as gold and silver. The chief advantage of the Portugal trade lies in facilitating all the various indirect foreign trades in goods for consumption conducted in Great Britain. Though this is not a decisive advantage, it is certainly a considerable one.

It seems plain enough that any annual addition that could reasonably be supposed to be made to the kingdom's plate or coin would call for only a very small annual import of gold and silver. Even without direct trade with Portugal, that small quantity could always readily be obtained somewhere.

Although the goldsmiths' trade is considerable in Great Britain, by far the greater part of the new plate they sell each year is made from old plate melted down. The annual addition to the kingdom's entire stock of plate therefore cannot be very great and would require only a very small annual import.

On Trade Treaties

When a nation signs a treaty agreeing to admit goods from one foreign country but not from others, or to spare that country’s goods from duties charged on all others, the favored country gains a major advantage. At least, its merchants and manufacturers do. They have a kind of monopoly in the country that favors them. That country becomes a larger and more profitable market for their goods. It is larger because rival nations’ goods are either barred or taxed more heavily, so more of the favored country’s goods are bought. It is more profitable because its merchants, with a kind of monopoly there, can often sell at higher prices than they could if every other nation were free to compete.

Such treaties may benefit merchants and manufacturers in the favored country, but they necessarily put those in the country granting the favor at a disadvantage. Their government gives a foreign country a monopoly at their expense. They often have to buy the foreign goods they need at higher prices than if sellers from other countries could compete freely. This means that the domestic goods exchanged for those foreign goods must fetch lower prices. When two things are traded for each other, one being cheap necessarily means, or really is the same thing as, the other being expensive. Every such treaty is therefore likely to reduce the exchange value of the country’s annual output. That reduction, though, is hardly likely to be an actual loss. It is a reduction in what the country might otherwise have gained. It may sell its goods at lower prices than it otherwise would, but probably not below their cost. Nor, as can happen with bounties, will it sell at a price that fails to replace the capital spent bringing them to market, along with the usual profit on stock. Such a trade could not continue for long. Even the country granting the favor may therefore gain from trade, though less than it would gain with free competition.

Other trade treaties have been considered useful for very different reasons. A trading country has sometimes granted foreign goods this kind of monopoly at its own expense because it expected to sell more to the foreign country each year than it bought from it. It expected to receive the difference in gold and silver each year. This is why people have so often praised the trade treaty between England and Portugal concluded in 1703 by Mr Methuen. Here is a literal translation of that treaty, which has only three articles.

ART. I. His sacred royal majesty of Portugal promises, for himself and his successors, that from now on Portugal will always admit British woolen cloth and other British woolen manufactures as it used to before the law prohibited them, on the following condition:

ART. II. Her sacred royal majesty of Great Britain must promise, for herself and her successors, always to admit wine produced in Portugal into Britain. Whether Britain and France are at peace or at war, the customs duty or any other charge, direct or indirect, on Portuguese wine imported into Great Britain in pipes, hogsheads, or other casks must never exceed the charge on the same quantity of French wine after one-third of that charge has been deducted. If anyone attempts to undermine this reduction in the duty, his sacred royal majesty of Portugal may lawfully ban British woolen cloth and other woolen manufactures again.

ART. III. The most excellent lords acting as plenipotentiaries promise to have their above-named rulers ratify this treaty and exchange ratifications within two months.

Under this treaty, Portugal’s crown must admit English woolen goods on the same terms as before the ban. It cannot raise the duties previously charged on them. But Portugal does not have to admit them on better terms than it grants any other country, such as France or Holland. Great Britain’s crown, by contrast, must admit Portuguese wine at only two-thirds of the duty charged on French wine, its most likely competitor. In this respect the treaty clearly benefits Portugal and harms Great Britain.

Yet people have hailed it as a masterpiece of England’s trade policy. Every year Portugal receives more gold from the Brazils than it can use in domestic trade as either coins or plate. The surplus is too valuable to leave idle in locked chests. Since it cannot find a profitable market at home, Portugal must send it abroad in exchange for something more valuable at home, regardless of any ban. Much of that gold comes to England each year in return for English goods or for goods from other European countries that receive payment through England. Mr Barretti was told that the weekly packet boat from Lisbon brings England more than £50,000 in gold in an average week. This figure was probably exaggerated. It would be more than £2,600,000 a year, exceeding what the Brazils are thought to produce.

Some years ago, our merchants were angry with the crown of Portugal. That crown had voluntarily granted them certain privileges, rather than promising them by treaty. It probably did so at Britain’s request, in return for much greater benefits in the form of help, defense, and protection from the British crown. Some of those privileges had been violated or withdrawn. The merchants who would normally be most eager to praise trade with Portugal were therefore inclined to say it was less beneficial than people generally thought. They claimed that by far the greater part, almost all, of this annual gold import came on account of other European countries, not Great Britain. The fruit and wine imported from Portugal into Great Britain each year, they said, nearly matched the value of British goods sent there.

But suppose all that gold did come on account of Great Britain and amounted to even more than Mr Barretti suggested. That would not make this trade better than another trade in which we sent out goods of the same value and received goods we could use of equal value in return.

Only a very small part of the imported gold can reasonably be thought to add each year to the country’s plate or coin. All the rest must go abroad in exchange for goods people can use. But England would benefit more by buying those goods directly with products made by English workers than by first using those products to buy Portuguese gold, then using the gold to buy the goods. Direct foreign trade in goods for consumption is always better than indirect trade. Bringing the same value of foreign goods to the home market requires much less capital by the direct route. England would therefore have been better off if less of its industry had made goods for Portugal and more had made goods for the other markets where British buyers’ desired goods are available. This way, it would need much less capital than it does now to obtain both the gold it needs for its own use and the goods people consume. Capital would be left over for other purposes, to put more people to work and increase annual production.

Even if Britain were completely shut out of trade with Portugal, it would have little trouble getting the gold it needs each year for plate, coin, and foreign trade. Like any other commodity, gold can always be obtained somewhere by people able to pay its price. Portugal’s annual gold surplus would still go abroad. If Britain did not take it, another country would, and would be happy to sell it again for its price, just as Britain now does. When we buy gold from Portugal, we buy it firsthand. If we bought it from any other nation except Spain, we would buy it secondhand and might pay a little more. But that difference is surely too small to concern the public.

Nearly all our gold, people say, comes from Portugal. Our trade balance with other nations is either against us or only slightly in our favor. But we should remember that the more gold we import from one country, the less we need to import from others. Like demand for any commodity, a country’s actual demand for gold is limited to a certain quantity. If nine-tenths comes from one country, only a tenth remains to come from all the others. Also, the more gold we import each year from particular countries beyond what we need for plate and coin, the more we must export to other countries. And the more the trade balance—that utterly unimportant concern of modern policy—seems to favor us with some countries, the more it must seem to go against us with many others.

England’s supposed inability to survive without Portuguese trade was a foolish idea. Yet near the end of the late war, France and Spain used it to demand that the king of Portugal keep all British ships out of his ports, although they claimed no injury or provocation. To guarantee the exclusion, they demanded that he admit French or Spanish garrisons into those ports. The king of Spain, his brother-in-law, proposed these humiliating terms. If the king of Portugal had accepted them, Britain would have escaped a burden far greater than losing Portuguese trade: having to support a very weak ally. He was so unprepared to defend himself that perhaps even the whole power of England, devoted to that single aim, could barely have protected him through one more campaign. Losing the Portuguese trade would certainly have created considerable difficulties for merchants then engaged in it. They might have needed a year or two to find another equally profitable use for their capitals. That would probably have been the full extent of the harm England suffered from this remarkable piece of trade policy.

The large annual imports of gold and silver are not mainly for plate or coin. They are for foreign trade. These metals make indirect foreign trade in goods for consumption more profitable than almost any other goods could. As universal tools of trade, they are accepted in exchange for other commodities more readily than any other goods. Because they pack great value into a small space, they also cost less to ship back and forth between places than almost any other kind of merchandise, and lose less value in transit. No commodities are therefore as convenient as gold and silver when purchased in one foreign country only to be sold or exchanged again for other goods in another. The main benefit of Portuguese trade is that it makes it easier for Great Britain to conduct its various indirect foreign trades in goods for consumption. Though not a major benefit, it is certainly a substantial one.

It seems clear that the amount of gold and silver needed each year to make any plausible addition to the kingdom’s plate or coins is very small. Even without direct trade with Portugal, we could easily get that small amount somewhere else.

Goldsmithing is a substantial trade in Great Britain. But most of the new plate goldsmiths sell each year is made by melting down old plate. The yearly increase in all the plate in the kingdom cannot therefore be very large, and requires only a very small annual import.